It's All in the Timing

Aug. 4, 2009 3:02 PM ET

We have all been preached the mantra that it is time in the market and not timing the market that makes money. Well of course that depends on how well one times the market. What many fail to realize is that timing is always taking place whether one is a buy and hold investor or a market timer. The buy and hold investor has to make the initial buy into the market at some point in time and has to sell at some point in time. Not very different from a market timer, except that a market timer with a strategy has an entry and if disciplined a pre-determined exit to cut losses to a minimum if entry is "mistimed" and a profitable exit to take profits when timing signals dictate. Time is a non-renewable resource, and the goal is to have better timing in the market to save time. If you can get out of the market and avoid a 30% decline, think of all the time in the market you just saved yourself. So there are three basic beliefs when it comes to timing the market:

1. Those that believe it can't be done, markets are efficient, whatever... These folks will not be able to time the market if they don't even believe it is possible.

2. Those that believe it can be achieved easily. These folks will be taught a very memorable and costly lesson or lessons (for those that don't get it the 1st time) by the market that it is anything but easily achieved. If this seems to contradict my earlier posts regarding being able to time the market, charts, technical analysis, etc., read below to see how even with showing you the tools and giving you ideas of how to do it, market timing isn't easy.

3. Those that believe it can be achieved but is a difficult endeavor. These folks have a shot at being up for the challenge provided they are willing to strive hard and remain disciplined.

Now when it comes to charts and technical analysis, even when there is a clear buy or sell signal given it is not easy to follow. You can have a sell signal on financials but the talking heads on tv are all preaching buy, valuations are low, ... You have to ignore that and sell or even short. Bullish sentiment will be high at the right time to short. You can also get stopped out a few times for small losses if you are short and the market goes higher until you catch a good downtrend. The voices inside you will want you to follow what everyone else is doing vs. staying disciplined and sticking to your strategy even through a couple of losing trades. Automating this can take away the emotion, but just like a plane doesn't fly on autopilot alone, neither should a trading system. There will be times when a human decision is crucial and can't be replaced by any amount of code.

So in essence what is my definition of market timing? It is easier to first define what market timing is not. Market timing is not a call on market direction. It may look like that from the outside looking in, especially when the timing is correct. But really market timing is a strategy that helps me manage risk when managing money -- risk of course being defined as a loss of capital (not variance as is the case in the MPT or modern portfolio theory world, sorry couldn't resist taking a stab at it) .